3 The Accounting Information System Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition

1 2 3 4 5 CHAPTER OUTLINE LEARNING OBJECTIVES Analyze the effect of business transactions on the basic accounting equation. 1 Explain how accounts, debits, and credits are used to record business transactions. 2 Indicate how a journal is used in the recording process. 3 Explain how a ledger and posting help in the recording process. 4 Prepare a trial balance. 5

1 Accounting Information System System of collecting and Analyze the effect of business transactions on the basic accounting equation. LEARNING OBJECTIVE 1 Accounting Information System System of collecting and processing transaction data and communicating financial information to decision-makers. LO 1

Accounting Information System Accounting information systems rely on a process referred to as the accounting cycle. Analyze business transactions Journalize Post Trial Balance Adjusting Entries Adjusted Trial Balance Financial Statements Closing Entries Post-Closing Trial Balance Most businesses use computerized accounting systems. LO 1

ACCOUNTING TRANSACTIONS Transactions are economic events that require recording in the financial statements. Not all activities represent transactions. Assets, liabilities, or stockholders’ equity items change as a result of some economic event. Dual effect on the accounting equation. LO 1

Discuss guided trip options with potential customer ACCOUNTING TRANSACTIONS Question: Are the following events recorded in the accounting records? Illustration 3-1 Transaction identification process Discuss guided trip options with potential customer Purchase computer Pay rent Event Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Criterion Record/ Don’t Record LO 1

Basic Accounting Equation ANALYZING TRANSACTIONS The process of identifying the specific effects of economic events on the accounting equation. Basic Accounting Equation Assets Liabilities Stockholders’ Equity = + LO 1

ANALYZING TRANSACTIONS Illustration 3-2 Expanded accounting equation LO 1

ANALYZING TRANSACTIONS Event (1). On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. 1. +10,000 +10,000 LO 1

ANALYZING TRANSACTIONS Event (2). On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. 1. +10,000 +10,000 2. +5,000 +5,000 LO 1

ANALYZING TRANSACTIONS Event (3). On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 LO 1

ANALYZING TRANSACTIONS Event (4). On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 LO 1

ANALYZING TRANSACTIONS Event (5). On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 LO 1

ANALYZING TRANSACTIONS Event (6). On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 LO 1

ANALYZING TRANSACTIONS Event (7). On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 LO 1

ANALYZING TRANSACTIONS Event (8). On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 LO 1

An accounting transaction has not occurred. ANALYZING TRANSACTIONS Event (9). On October 9, Sierra hired four new employees to begin work on October 15. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 An accounting transaction has not occurred. LO 1

ANALYZING TRANSACTIONS Event (10). On October 20, Sierra paid a $500 dividend. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 10. -500 -500 LO 1

ANALYZING TRANSACTIONS Event (11). Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 10. -500 -500 11. -4,000 -4,000 LO 1

1 DO IT! Transaction Analysis A tabular analysis of the transactions for the month of August is shown below. Describe each transaction. 1. Company issued shares of stock for $25,000 cash. 2. Company purchased $7,000 of equipment on account. 3. Company received $8,000 cash in exchange for services performed. 4. Company paid $850 for this month’s rent. LO 1

2 Debit and Credit Procedures Double-entry system Explain how accounts, debits, and credits are used to record business transactions. LEARNING OBJECTIVE 2 Debit and Credit Procedures Double-entry system Each transaction must affect two or more accounts to keep the basic accounting equation in balance. Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS. LO 2

DEBIT AND CREDIT PROCEDURES If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 LO 2

DEBIT AND CREDIT PROCEDURES If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 LO 2

Procedures for Assets and Liabilities Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. ▼ HELPFUL HINT The normal balance is the side where increases in the account are recorded. LO 2

Procedures for Stockholders’ Equity Investments by stockholders and revenues increase stockholders’ equity (credit). Dividends and expenses decrease stockholder’s equity (debit). LO 2

Procedures for Stockholders’ Equity Revenues increase stockholder’s equity. Expenses have the opposite effect: expenses decrease stockholders’ equity. The effect of debits and credits on revenue and expense accounts is the same as their effect on stockholders’ equity. LO 2

STOCKHOLDERS’ EQUITY RELATIONSHIPS ILLUSTRATION 3-15 Stockholders’ equity relationships LO 2

DEBIT/CREDIT RULES Normal Balance Debit Normal Balance Credit LO 2

SUMMARY OF DEBIT/CREDIT RULES Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Debit Credit LO 2

SUMMARY OF DEBIT/CREDIT RULES Relationship among the assets, liabilities and stockholders’ equity of a business: ILLUSTRATION 3-16 Basic Equation Assets = Liabilities + Stockholders’ Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit. LO 2

SUMMARY OF DEBIT/CREDIT RULES Review Question Debits: increase both assets and liabilities. decrease both assets and liabilities. increase assets and decrease liabilities. decrease assets and increase liabilities. LO 2

SUMMARY OF DEBIT/CREDIT RULES Review Question Accounts that normally have debit balances are: assets, expenses, and revenues. assets, expenses, and equity. assets, liabilities, and dividends. assets, dividends, and expenses. LO 2

Indicate how a journal is used in the recording process. LEARNING OBJECTIVE 3 The Recording Process Analyze each transaction in terms of its effect on the accounts. Enter the transaction information in a journal. Transfer the journal information to the appropriate accounts in the ledger. Journalize the transaction Analyze business transactions Post to ledger accounts LO 3

THE RECORDING PROCESS Analyze transaction Enter transaction Journalize the transaction Post to ledger accounts Analyze business transactions ILLUSTRATION 3-17 The recording process Analyze transaction Enter transaction Transfer from journal to ledger LO 3

THE JOURNAL Transactions recorded in chronological order in a journal before they are transferred to the accounts. Contributions to the recording process: Discloses the complete effects of a transaction. Provides a chronological record of transactions. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. LO 3

THE JOURNAL Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. Oct. 1 Sierra issued common stock in exchange for $10,000 cash. 1 Sierra borrowed $5,000 by signing a note. 2 Sierra purchased equipment for $5,000. Instructions - Journalize these transactions. LO 3

THE JOURNAL Oct. 1 Sierra issued common stock in exchange for $10,000 cash. General Journal Oct. 1 Cash 10,000 Common Stock 10,000 LO 3

THE JOURNAL Oct. 1 Sierra borrowed $5,000 by signing a note. Oct. 1 General Journal Oct. 1 Cash 5,000 Notes Payable 5,000 LO 3

THE JOURNAL Oct. 2 Sierra purchased equipment for $5,000. Oct. 2 General Journal Oct. 2 Equipment 5,000 Cash 5,000 LO 3

THE JOURNAL LO 3 ILLUSTRATION 3-18 Recording transactions in journal form LO 3

3 DO IT! Journal Entries The following events occurred during the first month of business of Hair It Is Inc., Kate Browne’s beauty salon: Issued common stock to shareholders in exchange for $20,000 cash. Purchased $4,800 of equipment on account (to be paid in 30 days). Interviewed three people for the position of stylist. The three activities are recorded as follows: 1. Cash 20,000 Common Stock 20,000 2. Equipment 4,800 Accounts Payable 4,800 3. No entry because no transaction occurred. LO 3

Explain how a ledger and posting help in the recording process. LEARNING OBJECTIVE 4 The Accounting Cycle Post to ledger accounts Analyze business transactions Journalize the transaction Trial Balance Adjusting Entries Adjusted Trial Balance Financial Statements Closing Entries Post-Closing Trial Balance LO 4

THE LEDGER The Ledger is comprised of the entire group of accounts maintained by a company. ILLUSTRATION 3-19 The general ledger LO 4

CHART OF ACCOUNTS Listing of accounts used by a company to record transactions. ILLUSTRATION 3-20 Chart of accounts for Sierra Corporation LO 4

POSTING The process of transferring journal entry amounts to ledger accounts. General Journal J1 Oct. 1 Cash 101 10,000 Common Stock 10,000 General Ledger Oct. 1 Stock issued J1 10,000 10,000 LO 4

POSTING Review Question Posting: normally occurs before journalizing. transfers ledger transaction data to the journal. is an optional step in the recording process. transfers journal entries to ledger accounts. LO 4

RECORDING PROCESS ILLUSTRATED Follow these steps: 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. ILLUSTRATION 3-21 Investment of cash by stockholders LO 4

LO 4 ILLUSTRATION 3-22

LO 4 ILLUSTRATION 3-23

LO 4 ILLUSTRATION 3-24

LO 4 ILLUSTRATION 3-25

LO 4 ILLUSTRATION 3-26

LO 4 ILLUSTRATION 3-27

LO 4 ILLUSTRATION 3-28

ILLUSTRATION 3-29 LO 4

LO 4 ILLUSTRATION 3-30

LO 4 ILLUSTRATION 3-31

JOURNALIZING SUMMARY LO 4 ILLUSTRATION 3-32 General journal for Sierra Corporation LO 4

Illustration 3-32 LO 4

POSTING SUMMARY ILLUSTRATION 3-33 General ledger for Sierra Corporation

4 DO IT! Posting Selected transactions from the journal of Faital Inc. during its first month of operations are presented below. Post these transactions to T-accounts. LO 4

5 Prepare a trial balance. The Accounting Cycle LEARNING OBJECTIVE Analyze business transactions Journalize the transaction Post to ledger accounts Adjusting Entries Adjusted Trial Balance Financial Statements Closing Entries Post-Closing Trial Balance LO 5

TRIAL BALANCE A list of accounts and their balances at a given time. Accounts are listed in the order in which they appear in the ledger. Purpose is to prove that debits equal credits. May also uncover errors in journalizing and posting. Useful in the preparation of financial statements. ▼ HELPFUL HINT Note that the order of presentation in the trial balance is: Assets Liabilities Stockholders’ equity Revenues Expenses LO 5

TRIAL BALANCE ILLUSTRATION 3-34 Sierra Corporation trial balance LO 5

LIMITATIONS OF A TRIAL BALANCE The trial balance may balance even when a transaction is not journalized, a correct journal entry is not posted, a journal entry is posted twice, incorrect accounts are used in journalizing or posting, or offsetting errors are made in recording the amount of a transaction. ETHICS NOTE An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical. LO 5

TRIAL BALANCE Review Question A trial balance will not balance if: a correct journal entry is posted twice. the purchase of supplies on account is debited to Supplies and credited to Cash. a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. LO 5

5 DO IT! Trial Balance The following accounts come from the ledger of SnowGo Corporation at December 31, 2017. Equipment $88,000 Dividends 8,000 Accounts Payable 22,000 Salaries and Wages Expense 42,000 Accounts Receivable 4,000 Service Revenue 95,000 Common Stock $20,000 Salaries and Wages Payable 2,000 Notes Payable (due in 3 months) 19,000 Utilities Expense 3,000 Prepaid Insurance 6,000 Cash 7,000 Prepare a trial balance in good form. LO 5

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